What is cost of capital?

The correct answer is B: Minimum return required on investment. The cost of capital represents the rate of return that a company must earn on an investment project to justify undertaking that project. It essentially reflects the cost of financing a business, whether through debt, equity, or a combination of both. For a project to be considered financially viable, its expected return must at least meet or exceed the cost of the capital used to fund it. It serves as a hurdle rate, ensuring that investments create value for the company's investors.

• Option A: Total profit is incorrect. Total profit is the net income a business earns after all expenses and costs have been deducted from its revenue. The cost of capital is a rate used to evaluate the potential for profit from an investment, not the profit itself.
• Option C: Total expense is incorrect. Total expense refers to all the expenditures incurred by a company over a period to generate revenue, such as operating costs, administrative costs, and selling costs. While financing costs are part of expenses, the cost of capital is specifically a *rate* representing the required return, not the aggregate sum of all expenses.
• Option D: Total revenue is incorrect. Total revenue is the total income generated from the sale of goods or services before any expenses are deducted. The cost of capital is a concept related to the financing of operations and investments, entirely distinct from the top-line revenue generated by sales.